Young Adults’ About-Face on Saving

When it comes to saving, no age-group has experienced a bigger change of heart than young adults.

Measures of saving rates among young adults under 35 show they’re suddenly saving a whole lot more. According to Moody’s Analytics, one measure, the four-quarter moving average of the saving rate of young adults — which smoothes out volatility — started dropping in the late 1990s and hit roughly -15% in 2006 — before climbing higher during the 2008 global financial crisis and its economic aftermath to over 5%. It’s now around 2% or 3%, as of the third quarter of 2012.

No other age group has seen so violent a turn from borrowing to saving. (See related article.) Sure, people between 35 and 44 also increased saving during the recession, but their about-face wasn’t as dramatic. Young people now save roughly as much as people 35 to 44 — and nearly as much as those between 45 and 54.

The trend suggests the recession may have made some young people more “risk averse,” economists’ jargon for less willing to take risks by, say, borrowing. It’s likely that many young people are having a harder time getting credit, especially those with super- high student-loan burdens. But young adults are also seeing their incomes fall, and generally make less money than older people. So they may now — post financial crisis and recession — find themselves less able to service debt. That, in turn, may reduce their demand for credit.

“Younger households were significantly dis-saving — aggressively borrowing — prior to the recession, but they are now saving at a healthy rate,” said Mark Zandi, economist at Moody’s Analytics.

“I think this clearly shows a significant increase in the risk aversion of younger households given the economic nightmare of the downturn and weak recovery,” he adds. “It is unclear how long this heightened risk aversion will last, but I suspect the last few years will have an indelible impact on how younger households think about their finances.”

Related: Young People Grow Wary of Borrowing as Student Loan Debt Grows

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